(Table: U.S. Demand for and Supply of Widgets) The United States can import widgets from China at $4 each and from Mexico at $5 each. The United States imposes a tariff of $2 on each of its widget imports. Suppose instead that the United States negotiated a free-trade agreement with China. Will the United States be better off or worse off as a result of its trade in widgets in the free-trade area with China?

Question

Quizplus · Accepted Answer

With the free-trade agreement with China, the United States can import widgets from China at a lower cost of $4 each without a tariff. This means there are no trade diversion losses because the United States can now import at a lower price rather than diverting imports from China to Mexico to avoid the $2 tariff. Therefore, the United States is better off with the free-trade agreement.

(Table: US